Through the corporate-funded American Legislative Exchange Council, global corporations and state politicians vote behind closed doors to try to rewrite state laws that govern your rights. These so-called "model bills" reach into almost every area of American life and often directly benefit huge corporations. ALEC is the heart and soul of the GOP.

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Tuesday, December 21, 2010

The 9 Biggest Conservative Lies About Taxes and Public Spending

The 9 Biggest Conservative Lies About Taxes and Public Spending

Here are the things the corporate media won't tell you about the tax-cut rhetoric in Washington.

December 19, 2010 |

It’s difficult to know where to begin deconstructing conservative rhetoric on taxes and spending. It's such a central part of their worldview, and yet it's a view informed by a whole slew of falsehoods that have been repeated again and again during this year's debates over the Bush tax cuts, public spending and the deficit. What follows are nine of the biggest fact-free whoppers that conservatives insist are true.

1. Cutting Taxes Leads to More Money for the Government

Conservatives can't say they oppose popular programs on ideological grounds, and they can't admit they're happy to run up huge budget deficits, so they've come up with the fiction that cutting taxes actually brings in more revenues to finance the public sector.

What's especially brazen about this is that it's usually preceded by debate-stifling phrases such as “as everyone knows,” “history shows us” or “every single time taxes have been cut.”

In 2007, Sen. John McCain, R-Arizona, said, “Tax cuts, starting with Kennedy, as we all know, increase revenues”; Sen. Kay Bailey Hutchinson, R-Texas, claimed that “Every major tax cut we've had in history has created more revenue," and Senate Minority Leader Mitch McConnell, R-KY said earlier this year that the myth represented “the view of virtually every Republican on that subject."

It's also complete nonsense, and it's worth noting that only conservative politicians and pundits make the claim -- economists across the ideological spectrum agree that the argument is cursed by voodoo math.

As Time Magazine'sJustin Fox noted in 2007, "Every economics Ph.D. who has worked in a prominent role in the Bush administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves—and were never intended to.” Harvard professor Greg Mankiw, a former chairman of Bush’s Council of Economic Advisers, dedicated a whole section of his economics textbook to debunking the claim.

And in an opinion column in the Wall Street Journal responding to Bush's claim that "You cut taxes, and the tax revenues increase," Andrew Samwick, who served as chief economist on Bush’s Council of Economic Advisers, wrote, “You are smart people....You know that the tax cuts have not fueled record revenues... You know that the first order effect of cutting taxes is to lower tax revenues.”

2. Conservatives' Favorite Economist Proves the Point

As I note in my book, The Fifteen Biggest Lies About the Economy, that falsehood is based in large part on an abuse of “Laffer’s curve,” the conservative media’s favorite economic theorem. The idea, first scribbled on a cocktail napkin by economist Arthur Laffer (according to lore), is pretty simple. It holds that you can raise income taxes to a degree, but when the top tax rate exceeds a certain point, people will go to such extraordinary lengths to avoid paying the piper that the government will actually end up collecting less revenue.

When Dylan Matthews asked a number of experts where the Laffer Curve “bends” for the Washington Post, the economists (he asked some conservative opinion columnists as well) all agreed that a top rate of 50 percent – several went as high as 70 percent – would still fall below the curve. That's important to keep in mind as we debate the merits of letting the top rate return to the 39 percent that prevailed during the Clinton years.

Each time taxes have been cut in the past few decades, it's led to a drop in revenues, which is why people like McCain like to go back to the Kennedy era, when cutting the top rate did spur growth and bring more money into the government's coffers. What they don't mention is that Kennedy cut the top rate from 91 percent to 70 percent, which has no bearing on the debate we're having today.*

3. Taxes on the Rich Keep 'Wealth Producers' from 'Creating Jobs'

We're all familiar with this one. In a New York Post column last week, Fox Business columnist Charles Gasparino claimed that businesses have "been hoarding cash instead of hiring" because of "the likelihood for higher taxes.” Media Matters responded by citing the CBO's finding that "[I]ncreasing the after-tax income of businesses typically does not create much incentive" to hire.

What's noteworthy about the narrative is the degree to which it defies simple common sense. It shouldn't be a matter of debate that only one thing creates jobs, and that's demand for companies' goods and services. The idea that a business that was booming would refuse to hire people and forego expansion because top tax rates might nudge upward is as silly as the idea that a business that has no customers would add new employees because its owners expect taxes to be low.

4. The Opposite: Tax Cuts for Upper Earners Spur Job Growth

Demand creates jobs, and U.S. Demand is way down because American households lost around $15 trillion dollars in wealth during the downturn. So it's important to note that research has shown that when you give a tax break to high-earners, they bank it, and when you give relief to working people, they spend it, increasing demand.

Like other types of public spending, giving cuts to those at the top does stimulate the economy, but very, very badly. According Mark Zandi, chief economist for Moody's, a dollar in tax cuts on capital gains adds .38 cents of economic growth and a dollar in corporate tax cuts brings us just .30 cents worth of stimulus, but a dollar in unemployment benefits gives the economy a boost of $1.63 and a buck worth of food stamps adds $1.73 in stimulus (PDF).

5. Only Half of American Families Pay Taxes

Rush Limbaugh put it this way: “The bottom 50 percent is paying a tiny bit of the taxes.... Remember this the next time you hear the ‘tax cuts for the rich’ business. Understand that the so-called rich are about the only ones paying taxes anymore.”

That's an entirely false narrative that emerges from some rather transparent sleight-of-hand. You have to look at the federal income tax in isolation and then pretend that it represents the government’s entire take. But the reality is that the government isn't financed from federal income taxes alone – far from it. Payroll taxes, for example, represent the biggest tax bite for the average worker.

When you add it all up—state and local taxes, federal taxes, sales taxes and excise fees—it turns out that the rich, the poor, and those in between all end up with about the same tax rate. That’s the conclusion of a 2007 study by Boston University economists Laurence J. Kotlikoff and David Rapson. They summarized, “The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3%, the median tax rate is 41.8%, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40%, plus or minus 5.3 percentage points.”

6. Americans Are Taxed to Death

This is one of those claims made so frequently that it becomes a matter of faith. But faith doesn't rely on fact, and this one is totally untrue.

In 2008, we ranked 26th out of the 30 countries in the Organization for Economic Cooperation and Development (OECD) in terms of our overall tax burden -- the share of our economy we fork over to the government. The U.S.came in almost 9 percentage points below the average of the group of wealthy nations, and some 20 percentage points below highly taxed countries like Denmark.

7. We're Being Killed by Runaway Government Spending

Public spending has increased with the wars in Afghanistan and Iraq, and, temporarily, with the stimulus package. And it will rise in the future as more baby boomers retire. But beyond that, it's important to understand how “limited” our government really is relative to other wealthy countries.

Sabina Dewan and Michael Ettlinger of the Center for American Progress crunched the data and found that between 2004 and 2007, the U.S. ranked 24th out of 26 OECD countries in overall government spending as a share of our economic output. Only Ireland and South Korea, both relative newcomers to the club, had a more “limited government” than we did during that span. Again, we came in around 7 percentage points of GDP below the OECD average -- and almost 20 percentage points beneath that of big spenders like France

8. Conservatives Favor Low Taxes and Limited Government

The Right loves “Big Government” as long as it's pursuing their preferred agenda. What they don't like are the government's most popular functions – assuring a social safety net, protecting consumers and the environment, subsidizing education, etc. They don't want to debate priorities, so they claim an ideological preference for a smaller government while showering tons of money on the military, law-enforcement, corporate subsidies, etc.

That's why the share of the economy represented by government spending (at the local, state, and federal levels combined) has been remarkably consistent during the last 40 years or so, regardless of which party controlled the White House or Congress.

In the two years that Gerald Ford presented budgets, government spending as a share of GDP averaged 31.4 percent; in ultra-liberal Jimmy Carter’s four years, it dropped to 30.7 percent; Ronald Reagan, the patron saint of fiscal conservatism, came into office, and it rose to 32.2 percent. It nudged slightly higher during the first George Bush’s term in office, then dropped to an almost Nixonian 30.3 percent during the Clinton years, before rising to 31.6 percent during the second Bush administration.

Looking at the other side of the ledger, overall government revenues have also remained relatively stable, but the pattern is reversed. The government’s take, as a share of GDP, dropped during the Ford era, rose again under Carter, and fell again under Reagan. Revenues rose by almost 2 percent under Clinton and fell by a percent and a half under George W. Bush. (The only exception: government revenues rose from 27.3 percent of GDP during the Reagan years to 27.6 percent under George Herbert Walker Bush – that was the “peace dividend.”)

Although the government taxes and spends at fairly similar rates, under Republican leadership the nation shells out a bit more for government services and takes in just a bit less in taxes. With a $15 trillion economy, those little differences add up to pretty big deficits, and this, rather than hot school lunches for poor kids, is responsible for a large chunk of our federal debt.

Given that reality, it's a wonder that conservatives have managed to convince the mainstream media and much of the country that they’re the fiscally responsible ones who are always ready to step in and clean up the nation’s budgetary mess.

9. Taxes on Top Earners Are Actually Taxes on 'Small Businesses'

For years, Republicans have pushed the spin that most of the Bush cuts for the highest earners were going to “small business owners,” the proverbial lifeblood of Small Town U.S.A. Then Republican national committee chair Ed Gillespie launched the meme in a 2003 speech, saying that “80% of the tax relief for upper income filers goes to small businesses.”

Fact-check.org, the nonpartisan campaign watchdog, looked at the claim, which was cooked up by GOP staffers on the House Economic Committee, and concluded that “it’s untrue—and a classic example of a statistical distortion gone amok.” The lie is pretty simple: around 80 percent of the wealthiest Americans report some business income on their tax returns, either from private partnerships (think big law firms) or from “hobby” businesses. And the GOP committee counted everyone who reported even a dollar on Schedule C of their returns as a “small business owner.”

The reality? Less than 2 percent of tax returns reporting small-business income are filed by people in the top two income brackets. As a Washington Post analysis concluded, “If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.”

*The "Kennedy tax cuts" were signed into law by Johnson, a year after JFK's assassination.